Most Indian banks and financial institutions do not have any environmental and social safeguard mechanisms.

Adding to its push for sustainable financing, the Reserve Bank of India (RBI) announced the regulatory framework for ‘green deposits’ earlier this month.

‘Green deposits’ are fixed deposits through which a bank raises finances and which yield an interest for the depositor. The money raised through such deposits is earmarked for green finance.

These are funds meant for activities of mitigation and adaptation to climate crisis, for example a recycling facility, non-fossil fuel based transport, renewable energy generation, biodiversity conservation, pollution control or sustainable water management.

Earlier in the year RBI had announced that it would issue guidelines on ‘Climate Risk and Sustainable Finance’ in a phased manner. The framework on green deposits forms a component of these guidelines.

Financial institutions offering green deposits are expected to formulate their policy in line with this framework.

Recognising the pivotal role that the financial sector can play in responding to the climate emergency, the framework is intended to encourage depositors and financial institutions to invest in ’green’ / sustainable activities.

RBI’s framework will come into force from June 1, 2023 and cover all regulated entities (RE) comprising banks and deposit-accepting non-banking finance companies (NBFC), including housing finance companies.

The proceeds from green deposits will be invested in renewables, clean transportation, sustainable water and waste management, green buildings, terrestrial and aquatic biodiversity conservation among others.

Why framework is important

Several Indian banks, such as the Federal Bank and HDFC, already have various green deposit schemes in place, according to a survey conducted by RBI last year. Where the RBI framework raises the bar are the provisions it advocates for preventing ‘greenwashing’ — the common practice of projecting an activity as environment-friendly when it is actually not.

The framework mandates the preparation of a ‘third party verification / assurance’ report on an annual basis to evaluate whether activities being financed through green deposits are meeting the green criteria. It will also assess whether the bank or NBFC has adequate policies and internal controls for project evaluation and selection, management of proceeds and validation of the sustainability information provided by the borrower to the RE.

In addition, the RE will have to prepare an annual impact assessment report for all such green finance activities / projects. These reports will have to be displayed on the website of the financial institution.

Other disclosures would comprise:

  1. The amount raised under green deposits during the previous financial year
  2. List of green activities / projects to which proceeds have been allocated, along with a brief description of the projects
  3. The amounts allocated to the eligible green activities / projects
  4. A copy of the third-party verification / assurance report

The framework prescribes an exclusion list comprising fossil fuel extraction, nuclear power generation, weapons, palm oil, hydropower above 25 megawatts and more.

Scrutiny of internal evaluation mechanisms in financial institutions, impact assessment of projects and public disclosure of such reports are major developments in the Indian banking scenario, which so far either do not collect or do not share such information.

Such measures constitute internal safeguard mechanisms of financial institutions, which prevent, monitor and mitigate adverse environmental and social impacts of projects financed by them.

Most Indian banks and financial institutions do not have any environmental and social safeguard mechanisms. RBI has hitherto refrained from advocating mandatory assessment and disclosure measures.

While the effectivity of the framework will have to be assessed in the way it is actually interpreted and implemented, it does recognise the contention of communities and civil society organisations that banks are accountable for environmental and social consequences of their activities, and have to carry out periodic assessment of the same and report about it to the public.

Even though the framework does not cover the social consequences of project funding, what is welcome about the RBI framework is that it recognises the need for financial institutions to adhere to standards, periodically monitor impacts and disclose them to the public, in addition to statutory compliances to environmental laws.

Why environmental, social monitoring limited to green

The question that arises is why should assessment mechanisms and disclosure requirements be limited to so called ‘green’ investments. Indian banks and financial institutions have massive exposure to projects which have immense adverse impacts on environment, communities and ecology.

Oil Change International’s recent report Banking on Climate Chaos points out that the State Bank of India is one of the thirteen biggest lenders to fossil fuels worldwide, which have no exit policy.

The newly released Finance Data Corner by the Centre for Financial Accountability gives us some idea of the money pumped by Indian banks and financial institutions into thermal power plants through debt financing over the last two decades.

Not just fossil fuels, Indian banks’ investments in renewables, such as hydropower projects, have come under the scanner owing to their devastating environmental and social impacts.

For instance, local communities in Sikkim’s Dzongu valley are resisting the Teesta Hydropower projectowing to floods and cracks in houses. ICICI Bank was the leading lender in the project. As the project ran into heavy losses, the bank had to eventually file an insolvency complaint for this project.

The so-called ‘brown’ investments by Indian financial institutions are having devastating environmental and social impacts, and are running into debts. This is all the more reason that Indian financial institutions require safeguards for all their big project financing and not just investments which are categorised as ‘green’.

Performance standards, safeguards needed

The annual impact assessment criteria outlined for ‘green deposits’ must logically extend to ‘brown’ ones as well. Moreover, in addition to environmental impacts, social impacts also need to be evaluated periodically.

The examples of community distress caused by development projects highlight the need for grievance redressal mechanisms.

Where such safeguards and redress mechanisms in financial institutions exist, communities have invoked them. Some examples are: The complaint filed by fishing communities against the International Finance Corporation, which is financing Tata Mundra Port project in Gujarat, and that against World Bank, which has put money in NTPC’s Visnugad-Pipalkoti project in Uttarakhand, by affected communities over loss of land, livelihoods and biodiversity.

Examples from around the world, such as Netherlands-based ASN Bank and Africa-based Ecobank, indicate that not only multilateral development banks such as World Bank or IFC, but also domestic banks are adopting measures to gear their investments towards sustainable projects.

It is high time that Indian financial institutions put in place a sustainability policy, defining the investment standards it should meet and a mandatory safeguards mechanism comprising periodical impact assessment, disclosure and grievance redressal, for all their big project investment. There is no reason why environmental and social accountability remains limited to ‘green’ investments alone.

This article was originally published in Down To Earth and can be read here.

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